On my way to the car this morning, I noticed that there were quite a few people gathering outside the Best Buy. It was almost like a mini-black Friday. At work I found out that all the queuing is for the new Playstation 3 release. This is at least 24-hours prior to the release, and there were already 20 people lined up to get it. And our weather wasn’t very good today. Pouring rain, lightning, tornado warnings. And yet those people were still there when I got home from work this evening. But the Best Buy people looked downright bedraggled when compared to the camp outside the Target. The Target people had tents and everything. Seriously hard core.

This whole scenario begs the question: Why are people lining up to purchase a new PS3? Why can you turn around and sell it on ebay for a 100% markup? It all boils down to one question: Why do game console manufacturers artificially create a shortage when releasing new consoles?

The answer is in two parts and really quite simple. The first (and minor) part is to get the Hype Machine rolling. If they create an artificial demand, people will do crazy things for it. All this buzz and hype gets coverage (even I’m writing about it). This is the kind of positive coverage that you can’t buy.

The second part of the answer is that it makes business sense. When the first generation of a console comes to market, the manufacturer is selling them below BOM cost (Bill of Materials). For those of you who don’t work with hardware, that means that they are selling it for less than parts it takes to make it. And there is no markup from the BOM cost to cover development expenses. They are just hemorrhaging money at this point. How can they get away with this? They make up the lost money on the back end by getting licensing fees from the game manufacturers. It is the same game as disposable razors. Give away the handle (the game console itself) and make the money back on the markup from the blades (the games without which your console is pretty much useless).

However, you can only make up so much on the back end, so the manufacturers have to staunch the bleeding somehow and they do it by building a limited run of consoles that go out initially. Each time they build another run of consoles, they have reduced the production cost somewhat so they lose less money. At some point they actually get close to making money on each console sold.

The companies gain two things from this. They can get the product to market sooner (rather than waiting the extra time to make it cost effective to build) and they can sell it at a reasonable price point (would you pay ~$800 for the PS3? or would you rather pay the ~$600 they are charging?). So while frustrating, these artificial shortages actually help both the company and the consumer.

But it doesn’t make me hate them any less.